Implications for Managers of Multinational Corporations - Literature review Example

? The process of expansion for the multinational companies has been facilitated due to liberalization by the governments of other nations, due to free flow of money across borders and due to the growth in world trade. Organizations can source not only raw materials but even human resources from anywhere across the globe. While this enhances better skilled people it also has helped in containing costs as expansion has been extensively taking place in the emerging economies. The emerging markets are those that are between the developed and the developing nations. Emerging markets offer tremendous opportunities for the multinationals as the emerging nations enjoy tremendous potential for growth and development. However, managers of the multinationals that seek to venture into emerging economies need to evaluate the business environment as their strategies are shaped by forces beyond their control. The managers have a vital role to play while formulating new strategies and organizational structures when dealing with Governments and companies in emerging markets. Financial strategy The emerging markets have fast growing GDPs thereby offering the MNCs with great opportunities and profit potential. However, the MNCs face not only the risks of cultural and institutional differences, the managers of the MNCs also have to take into account the risks inherent in unpredictable politics and unstable economies (Anonymous, 1995). The managers thus have the responsibility to develop financial strategies that provide protection from excessive risks. As far as financial strategies are concerned, some MNCs use instruments such as asset-backed securities while others work with regional and global banks. Financial institutions such as the Asian Development Bank help the governments establish priorities for economic reform and development. The regional/local governments offer resistance to MNCs as it fears the domestic production would be affected. The governments feel that while the MNCs would bring cutting-edge technology along with FDI into emerging economies, there is resistance from the domestic competitors. The managers must also take into account technology transfer, cultural distance, international experience, immigrant experience, industrial barriers, foreign exchange rate and host country barriers (Zhao & Decker, 2004). The MNCs have the power to stifle economy because of their sheer size or so believes the emerging economy governments and hence the MNCs may face protectionist attitude from the host governments. MNCs may have anti-corporate and anti-establishment sentiments triggered by the civil societies in the host governments. Thus through the right entry strategy the managers can overcome resistance offered by the protectionist government. The MNCs enter Central and Eastern Europe by forming strategic alliances through acquiring privatized firms or state-owned enterprises (Rondinelli & Black, 2000). These MNCs face the challenge of privatization although some governments do move ahead at speed to privatize the SOEs. Some Eastern Europe governments do make it difficult for foreign investors to enter into strategic alliances or form joint ventures. Russia receives very little FDI because of the high tariffs and non-tariff barriers on FDI. In fact, in some of the developing economies, the MNCs are seen as threats by some SOEs, privatized companies, government agencies or political interest groups that do not support foreign domination. Therefore the challenge for the MNC managers lies in developing alliances or acquisitions that benefits the shareholders, the host-country counterparts and the local government as well. The managers must hence prioritize business objectives while also selecting the best entry channels. They must evaluate the potential impact on the host-country stakeholders and determine local partner fit. If MNCs are seen as partners in privation and economic transformation the alliances or acquisitions are more likely to succeed. Substantial restructuring may need to be implemented by the MNCs to make the venture succeed. Market entry strategy A major concern for most managers of MNCs is the mode of entry into emerging markets. This, too a large extent, would depend on the sector, the firm size, the product or service on offer, and the investments planned. In short, market factors, global strategic factors, transaction-specific factors and government-imposed factors influence the entry strategy (Zhang, Zhang & Liu, 2007). The mode of entry should be right the first time because wrong choice can lead to lost potential and loss of important committed resources such as loss of time and money (Rajan & Pangarkar, 2000). Each entry mode has its own inherent risks, resource commitment and involvement of control. Based on the level of control, on the degree of investments and the different theoretical perspectives, the resource commitments are made (Brouthers & Hennart, 2007). Where foreign ownership is restricted, joint ventures provide the solution. Agarwal and Ramaswami (1992) emphasize three other determinants of the entry choice – ownership advantages, location advantages and the internalization advantages, commonly known as the OLI framework to evaluate the choice of entry. The characteristic of the technology being transferred also determines the entry mode in emerging economies. However, to evaluate the right mode of entry the managers must have knowledge of the host market and the organizational capability of the firm. The managers must have sufficient knowledge of the host country and feel capable of setting up operations in these emerging markets. This knowledge would help them withstand environmental uncertainties. In the service sector brand extension strategy helps the MNCs to keep the marketing costs low while the chances of success are high as in the case of DHL in China (Pina et al, 2006). DHL entered China under joint venture with SINOTRANS which has unrivalled local knowledge which helped DHL through its initial stages of establishment. Pairing with the government Knowledge of how the local governments would respond to proposals helps the MNCs to devise the right strategy. For instance, General Motors (GM) did not succeed with its entry strategy in Japan despite their aggressive approach. They thus decided to enter China through R&D based on the request from the local government (Hara & Nakanishi, 2004). At that time all other auto companies were reluctant to share their technology with the emerging markets but GM took the bold initiative and tied with the government for R&D. This initial bold approach has enabled GM to subsequently establish and develop its own sales channels to create local sales function. Pairing with the government helped GM to set up its R&D because MNCs in emerging economies usually face constraints such as inadequate intellectual property rights in establishing research and development centers (Choudhury, 2010). Other constraints include accessing knowledge and resources localized at the headquarters and other global locations. The local inventors lack the inventor ties available at the headquarters as there is information asymmetry between the headquarters and the local inventors. The MNC managers must also be cautious because the local inventors have no prior track record and credibility to undertake such initiatives. The MNCs must leverage their internal organization and internal labour resources to secure funds and knowledge residing in other global locations. Pairing up with the government also helps minimize risks in entering emerging economies. Motorola also adopted the insiderazition policy in China and established joint committee with the electronics department in China (Hara & Nakanishi, 2004). To handle competition it focused on high-end users of mobile phones; to get the approval of the communities, it carried out philanthropic activities like establishing elementary schools. Due to its innovative designs it could capture the interest of the sophisticated, wealthy and young users. Cultural distance The cultural distance between the developed and the developing economies is phenomenal and this can impact how the manager can operate in a developing nation. The drivers of globalization have been cross-border trade and liberalization, expansion of FDIs and the proliferation of technology. These are supposed to have homogenized societies across nations and cultures but the MNCs and the managers find that working across borders is a challenge due to the cultural distance between the developed and the developing nations. The MNCs attempt to adopt their domestic business model to foreign locations but they meet with disastrous results (Knab, 2008). Business models developed in sophisticated locations and mature domestic economies cannot be always applicable in foreign markets that may have limited infrastructure or due to differences in local customs. Ritz Carlton of USA received the Malcolm Bridge Award for quality in 1992 but when they applied the same model in Hong Kong, they did not succeed due to the difference in the cultural environment. Managers from the US tried to impose the same culture in Hong Kong but the Hong Kong culture did not permit them to work too closely with each other. They could not even share information as ‘knowledge is power’ (Hope & Muhlemann, 2001). This demonstrates Hofstede’s strong versus weak uncertainty avoidance culture as people in Hong Kong are not willing to accept accountability and responsibility as in the US. Even in devising the incentive packages, the cultural differences have to be accounted for, says Teare (1995). Knab contends that MNCs often lack viable and alternative strategies and hence the same cycle of modeling the successful business strategy is practiced in their domestic business environment. Cultural patterns become so embedded in the system that individuals remain unaware of the pattern (Rapaille, 1999). Various events and incidents have shaped the British culture and this culture remains invisible to the British themselves (Hill, 2009). The local culture influences the values and beliefs. For instance, in Pakistan, en emerging economy, the local people tend to leave everything to destiny and claim ‘inshallah’ which implies ‘if God wills’. This can pose a challenge to the expatriate manager of an MNC from a developed country where uncertainty avoidance is weak and people take responsibility for their own actions. Being a high power distance culture, people in Pakistan and other emerging nations tend to view seniority as authority, says Hill (2009). Subordinates too prefer to receive instructions and are not keen to take independent decisions. It may be necessary to decentralize operations when the local managers of the MNCs are under pressure for local adaptation in issues concerning human resources. The local managers have to be sensitive to the values and the attitudes prevalent in that country (Edwards & Kuruvilla, 2005). The local managers have to abide by the local regulations and labour market rules and hence decentralization helps. The headquarters must devolve responsibilities to the local managers who know the local environment. The local managers of MNCs should also be aware of two factors – the global-local issue is highly politicized and it is shaped by international operations. Communication Culture also impacts communication and communication is the essence of cross-cultural environment (Hill, 2009). Thus the local managers of MNCs would need to build up a glossary of terms that is understood by everyone at the workplace. For instance, in Britain, a formal tone of, “May I suggest…” is equivalent to instruction which may not be readily understood by other cultures. Thus the expatriate managers have to be trained in local language and customs to avoid any complication in execution of work or in harmony at the workplace. They should be aware of the formal greetings that operate in unfamiliar culture. Building healthy relationships are essential to avoid costly failures. Communication is a dilemma in multi-cultural environments (Devine, Baum, Hearns, & Devine, 2007; Baum 2007) but can be overcome through inclusive language, effective communication processes, cross-cultural training, adopting the mechanism to listen, through rewards and recognition (Baum, 2007). Buttery and Holt (2000) thus highlight that international managers must understand the different cultural contexts. An international manager must have the leadership abilities; he should have the ability to articulate vision, values and strategy. They have to make sense of their environment where sense making is grounded in identity construction and driven by plausibility (Kumar, Ulijn, Weggeman & Van der Van, 1997). Sensemaking becomes necessary when the managers are confronted with a gap between their expectations and the reality. How managers interpret their internal and external environment is critical to their shaping the strategy. These managers may also have to deal with dissimilar psychological development patterns (Korac-Kakabadse & Kouzmin, 1999). This requires that they have the ability to tap into providing intrinsic motivation for people from diverse cultures. With this preparedness the local manager would be able to cope with the cultural differences to a large extent. Essential qualities in local managers of MNCs The local managers must be free to focus on the front office and hence the financial controls and the information systems should be left to the regional or the global functional managers. This means they need to listen to the voice of the local competitors, evaluate the local competitors’ strategy and build government relations (Martinez & Quelch, 1996). The best MNC local manager would be able to discover, nurture and leverage their most critical resources. Cultural leadership is critical to the success of an MNC and the local leaders must be able to recognize the value of creating a consistent corporate culture. Conclusion Emerging markets pose definite challenges because of the poor infrastructure, uncertainties and inherent risks involved. Thus the managers of MNCs need to devise and revise their strategy to cope with the changing business environment as a result of globalization. The financial strategies should be such designed to protect the organization from excessive risks. The mode of entry should enable the organization to leverage the maximum benefit, maintain control and with minimum investments. Privatization is a struggle in most developing economies and hence the best method is to enter through strategic alliances or through acquisition of the state-owned enterprises. This to some extent can make the privatization process smoother. Knowledge of the local rules and regulations is essential and hence local managers must have access to local government procedures. The managers have to note that strategies, organizational structures and techniques applicable in their domestic business environment are not applicable universally in all markets. Cultural differences impact what can or cannot work in other environments. Individual values and attitudes govern the market place and this cannot be changed overnight. Moreover, organizational culture also differs across continents. At the same time, national cultures cannot be ignored either. Thus, there is no ‘best strategy’ and hence the strategy would differ across size of the organization, nature of the product/service offered, and the geographical location. At times one may have to pair up with the government as GM did to enter China. Pairing up with the government ensures support to get established. Cross-cultural training becomes essential so that the expatriate manager does not feel lost in a strange environment. Effective communication demands that they be trained in local language, culture and customs which can help avoid conflicts at the workplace. Experienced local managers should comprise of the staff which must be strong enough to understand the local culture, and are able to translate that understanding in to practice. It is essential to assimilate and integrate the character of the emerging market into the way they do business. Alternative strategies must be evaluated and local practices followed. They must be able to respond to their internal and external environment promptly as the difference between the success and failure relies on how quickly and efficiently they are able to respond to different situations. References Agarwal, S. & Ramaswami, S. . (1992). 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